Sunday, June 22, 2008

Why doesn't the World Bank's growth commission admit that experts don't have all the answers?

Bill Easterly suggests (here) that the recently published report of the World Bank growth commission (here) answers the question of how to promote high growth rates by saying something like: “we do not know, but trust the experts to figure it out”.

Does the report really say or imply that? The report identifies some of the distinctive characteristics of high growth economies and asks how other developing countries can emulate them. It talks of the importance of: bringing in ideas, technologies and knowhow from the rest of the world; international trade and specialization; structural transformation through microeconomic processes of creation and destruction; and high national savings rates. The report also notes that an important characteristic of high growth economies is “an increasingly capable, credible and committed government”. It discusses the need to rely on markets to allocate resources efficiently, the role of market and regulatory institutions that underpin mature market economies, the need for investment in infrastructure, education and health, the need for social safety nets to protect the losers from economic change and the need for a commitment to equality of opportunity to give everyone a fair chance to enjoy the fruits of growth.

It would seem from this brief summary that the World Bank growth commission - with its 21 world leaders and experts, an 11-member working group, 300 academic experts, 12 workshops and a budget of $4 m - has actually come to some conclusions about how to promote economic growth. Arguably, there is not much advance here on what the World Bank was writing in the 1990s about “the east Asian miracle” or, for that matter, on what Adam Smith wrote in “Wealth of Nations” in 1776 - but findings about the characteristics of more successful economies are probably worth re-stating from time to time.

So, is Bill Easterly mistaken? Not at all. He makes the point that only two of the 13 high growth episodes the commission studied were ongoing. Yesterday’s growth failures are today’s successes (e.g. India) and yesterday’s successes (e.g. Brazil) are today’s failures. And he points out that much of this volatility is inexplicable and unpredictable.

The World Bank growth commission comes close to acknowledging their own ignorance of the art of policy making when they note that some countries have sustained high growth for quite long periods without the deep institutional underpinnings that define property rights and enforce contracts in mature market economies. Consider the following odd sequence of sentences: “Indeed, an important part of development is precisely the creation of these institutionalized capabilities. Even without them, growth can occur, and these institutions can co-evolve with the economy as it expands. However, we do not know in detail how these institutions can be engineered, and policy makers cannot always know how a market will function without them” (p 4).

All the authors of the report needed to add, before putting “the art of policy making” in the too hard basket, was some comment to the effect that the best advice an economist can give policy makers is to consider the incentives that their policies are likely to create.

However, the commission could not acknowledge that it does not have any expertise in advising the governments of developing countries about “the art of policy making”. It couldn’t resist making inane comments like: “Bad policies are often good policies applied for too long” (p 6).

Rather than trying to imagine what might have been going on in the minds of the experts who signed off on that particular pretence of knowledge, readers would be better served by pondering the following quote from Friedrich Hayek:

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. ... The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals. (Nobel prize lecture given in 1974, available here).

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